The State of E-sports in Asia

July 19, 2019

Could e-sports be something more than it is at the moment? There are currently piles of cash pouring into e-sports around the world. The massive success of games like Fortnite and Apex Legends (which had >20m players in the first week) has caused investors to increase their attention on the space. I spent a bit of time talking to people that have been actively engaged in the space for the past decade in Asia to get their take on where e-sports in Asia is and where it’s going.

TLDR: It’s still hard to make money in e-sports in Asia but professional gamers have an edge because the cost of living can be significantly lower than in more developed countries. The main areas that are seeing investment at the moment are in peripheral providers (which may have negative margins but are looking to grow and then sell themselves) and speculative plays such as buying franchises (where there might not be a lot of money at the moment but if groomed correctly could prove profitable in the future).

If you aren’t already familiar with the investments in e-sports, you could compare the valuations of some of the e-sports teams to some of the valuations of traditional sports. Manchester United has an enterprise value of $3bn and the New England Patriots have a reported enterprise value of $3.8bn, although it was acquired by Robert Kraft for $172m in 1994. Compare that against the value of the e-sports teams which sit at about 1/10th of that amount below:

The Issue

While it might be a bit of speculation and require a substantial amount of capital investment, there could be some money to be made from e-sports franchises if the popularity catches on and viewership increases. The issue which is preventing e-sports from capturing a larger mass-market audience is the industry structure.

Typically the entertainment industry is broken down into three different layers:

  • Governors: These are the bodies that create the rules. While this might represent the NFL or FIFA in traditional sports, it’s the game companies that are creating the games themselves. This makes sense because the developers need to create the rules around any competitive games and embed them in the code themselves.
  • Leagues: The leagues for traditional sports can be organised by national, regional or international bodies. Typically, there’s no limit on who can organise a league as long as they can get enough people who want to participate. This is somewhat different in e-sports because the leagues are typically organised by the game creators limiting the ability of e-sports to profligate.
  • Media: Third parties bid for the rights to broadcast traditional sports and recoup that expense through pay-per-view services and advertising. As above, this section is also controlled by the game developers. They can decide where and who they broadcast to. This is typically done over an internet platform, which makes sense because games are delivered over the internet.

As can be seen, these layers mean that traditional sports have multiple different parties who have different agendas at each level. Each pursuing their own interests allows the popularity of the game to spread and helps to increase the reach of each sport. In e-sports, the whole industry for a game is largely controlled by the game developers.

At this point, it’s worthwhile looking at what types of games typically become e-sports. Generally, it’s the free-to-play games where users are able to spend in game to acquire skins and other digital items (e.g. DOTA2, Fortnite, Apex). Game franchises that are reliant on annual releases to drive revenue growth (e.g. Call of Duty) are unlikely to experience the same kind of fanfare or viewership. This could also be a result of the fact that people like to watch others perform a skill that they practice at a high level.

The Solution

There’s an opportunity for game developers to outsource the leagues and broadcasting of the games. Let’s face it, broadcasting and distributing live events isn’t a game developers core competency. It’s likely that these weaknesses are filled by specialists who are focused on running regional or national competitions (the developers could reserve the right to produce the international tournaments — the equivalent of the Olympics for a given title).

I’ve heard numerous stories of people who have been drawn to e-sports who wouldn’t have otherwise found them interesting. It could be a result of the pace or the ability to bring a higher level of production value to the events. As the world is created virtually, it’s possible to always have the best angle and different ways to capture the action. I remember when they introduced computer graphics to America’s Cup races, it made them instantly more accessible and understandable for viewers. Previously, it was difficult to understand how far behind a boat was, what speeds they were travelling at or how tactics were playing out. Now, you can understand all of these things and more because of the way that the races are produced. All of the technology and more is going to be available for the production of e-sports events.

As it is, there are millions of people tuning into Twitch on a daily basis to view their favourite gamers, learn strategy or just stream snipe. I was recently watching a streamer that drew a bigger crowd than a prime time New Zealand television audience (I know it’s a small country but still this is a trend that cannot be ignored). If new entrants were incentivised to put the same level of production into events at a national and regional level, while being incentivised to increase viewership, there could be a proliferation of e-sports as a form of entertainment in households where there is currently no appeal.

Conclusion

The top players in e-sports teams come from around the world, from countries that are ravaged by internal conflict or places that have limited economic opportunities. Anywhere that has a computer and access to the internet could potentially spawn the next e-sports superstar. It would be a meaningful step in the right direction if the game developers were willing to cede control over the value-chain and allow other independent participants to enter, who could, in turn, create further value and allow the ecosystem to continue to develop.